What is APR and how is it different from interest rate?

APR (Annual Percentage Rate) is the true yearly cost of borrowing, including the interest rate plus all mandatory fees and charges. The interest rate reflects only the cost of borrowing the principal, while APR adds origination fees, closing costs, discount points, and other lender charges. For example, a $200,000 mortgage at 6.5% interest with $3,000 in fees has an APR of approximately 6.58%. Under the federal Truth in Lending Act, all lenders must disclose the APR, giving borrowers a standardized way to compare loan offers regardless of how different lenders structure their fees.

Why is APR always higher than the interest rate?

APR is higher because it includes costs beyond the interest rate itself. When you pay an origination fee of 1-5% or closing costs of $2,000-$5,000, those costs are spread across the loan term as part of the APR calculation. The only situation where APR equals the interest rate is when a loan has zero fees, which is rare. On a $20,000 personal loan with a 3% origination fee ($600), a 6% interest rate translates to approximately a 7.15% APR because you are paying $386.66/month on a loan but only received $19,400 in proceeds. The larger the fees relative to the loan amount and the shorter the term, the bigger the gap between rate and APR.

Should I compare loans using interest rate or APR?

Use APR when comparing the total cost of borrowing over the full loan term, as it includes all fees and charges in a single number. However, if you plan to refinance or sell before the loan term ends, focus more on the interest rate and minimize upfront fees. For example, paying $5,000 in points to reduce your mortgage rate by 0.25% only makes financial sense if you keep the loan long enough to recoup that cost through lower monthly payments. The break-even point is typically 5-8 years. For credit cards, the interest rate and APR are effectively the same since there are no upfront fees.

What fees are typically included in APR?

Fees included in APR vary by loan type. For mortgages, the APR includes origination fees, discount points, mortgage insurance premiums, and most closing costs. It typically excludes title insurance, appraisal fees, and attorney fees, though practices vary by lender. For personal loans and auto loans, the APR includes origination or documentation fees. For credit cards, the APR reflects the interest rate directly (annual fees are disclosed separately). The CFPB provides guidance on which fees must be included, but when in doubt, ask your lender for a full breakdown of what is and is not in the disclosed APR.

What is the difference between APR and APY?

APR (Annual Percentage Rate) is used for loans and reflects the cost of borrowing including fees. APY (Annual Percentage Yield) is used for savings and investments and reflects the actual return you earn after accounting for compounding frequency. A savings account with a 5.00% APR compounded daily has an APY of approximately 5.13% because interest earns interest throughout the year. When comparing savings accounts, always compare APY to APY. When comparing loans, compare APR to APR. The two metrics serve opposite sides of the same equation: APR is what you pay to borrow, and APY is what you earn on deposits.

APR Calculator

Calculate the true annual percentage rate of a loan including all fees and costs.

Quick Answer

APR (Annual Percentage Rate) is the yearly cost of a loan including interest plus fees, expressed as a percentage. Unlike the nominal interest rate, APR includes origination fees, points, and closing costs, which is why the federal Truth in Lending Act (TILA) requires lenders to disclose APR on every consumer loan.

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Loan Amount ($)

Interest Rate (% p.a.)

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Total Fees & Costs ($)

Include origination fees, closing costs, points, etc.

True APR

Stated Interest Rate 0% Monthly Payment $0 Total Interest $0 Total Fees $0 Total Cost (Interest + Fees) $0 Total Amount Paid $0

How APR Works

APR (Annual Percentage Rate) is the true yearly cost of borrowing money, expressed as a percentage that includes both the interest rate and mandatory fees. The Consumer Financial Protection Bureau (CFPB) defines APR as the cost of credit expressed as a yearly rate, including interest, points, and certain other charges. Under the federal Truth in Lending Act (TILA), all lenders are required to disclose the APR to borrowers, enabling standardized comparisons across loan offers.

While the interest rate only reflects the cost of borrowing the principal, APR captures the full picture by rolling in origination fees, closing costs, discount points, and other lender charges. For example, a mortgage advertised at 6.5% interest with $4,000 in fees on a $300,000 loan might have an APR of 6.72%. This makes APR the most reliable metric for comparing loans from different lenders. Use this calculator alongside our mortgage calculator or loan calculator to understand the true cost of any borrowing decision.

How APR Is Calculated

APR is computed by finding the interest rate that equates the present value of all monthly payments to the net loan proceeds (loan amount minus fees). The formula is solved iteratively:

(P − Fees) = ∑ PMT / (1 + APR/12)^k for k = 1 to n

Where:

P = principal loan amount
Fees = total upfront fees (origination, closing costs, etc.)
PMT = monthly payment based on the stated interest rate
APR = annual percentage rate (solved using Newton-Raphson iteration)
n = total number of monthly payments

Worked example: A $20,000 personal loan at 6% stated rate with a 3% origination fee ($600) over 5 years. Monthly payment at 6% = $386.66. Net proceeds = $19,400. Solving for APR: the rate that makes the present value of 60 payments of $386.66 equal $19,400 is 7.15%. The 3% origination fee adds 1.15 percentage points to the effective annual cost.

Key APR Terms You Should Know

Nominal interest rate: The stated rate on the loan, without accounting for fees or compounding. Also called the "note rate."
APR (Annual Percentage Rate): The effective annual cost including interest plus mandatory fees. Always equal to or higher than the nominal rate.
APY (Annual Percentage Yield): Used for deposits and savings, APY accounts for compounding frequency. A 5% APR compounded monthly yields an APY of 5.12%.
Origination fee: A one-time charge by the lender for processing the loan, typically 0.5-5% of the loan amount.
Discount points: Upfront fees paid to the lender (each point = 1% of loan) to reduce the interest rate. One point on a $300,000 mortgage costs $3,000 and typically reduces the rate by 0.25%.

APR vs Interest Rate by Loan Type

The gap between stated interest rate and APR varies significantly by loan type. According to Federal Reserve data, here are typical ranges as of early 2026:

Loan Type	Typical Interest Rate	Typical APR	APR Gap
30-Year Fixed Mortgage	6.5-7.0%	6.7-7.3%	0.15-0.30%
Auto Loan (New Car)	5.5-7.5%	5.6-7.8%	0.1-0.3%
Personal Loan	8-24%	10-28%	1-4%
Credit Card	N/A	20-28%	Rate = APR (no upfront fees)
Student Loan (Federal)	5.5%	5.5-6.0%	0-0.5%

Practical APR Examples

Example 1 -- Comparing two mortgage offers: Lender A offers 6.5% with $3,000 in fees on a $300,000 30-year mortgage (APR = 6.58%). Lender B offers 6.75% with $500 in fees (APR = 6.77%). Despite the higher stated rate, Lender A still has the lower APR and costs less over the full term. But if you plan to sell after 5 years, Lender B may cost less because the $3,000 in fees is spread over fewer years.

Example 2 -- Personal loan with origination fee: You borrow $15,000 at 10% stated rate with a 5% origination fee ($750) for 3 years. Your monthly payment is $484 based on the full $15,000, but you only receive $14,250. The APR is 13.46%, significantly higher than the stated 10%. Use our personal loan calculator to see the full payment schedule.

Example 3 -- Auto loan with dealer markup: A dealer offers a $30,000 auto loan at 4.9% for 60 months with a $500 documentation fee. The APR is 5.24%. A credit union offers 5.5% with no fees (APR = 5.50%). Despite the higher rate, the dealer loan has the lower APR and saves $230 over the life of the loan.

Tips for Using APR to Save Money

Always compare APR, not just interest rates: A loan with a lower rate but higher fees can cost more than one with a higher rate and no fees. APR normalizes this comparison.
Consider your actual holding period: APR assumes you keep the loan for its full term. If you plan to refinance or sell within 3-5 years, upfront fees have a disproportionate impact. In that case, minimize fees even if the rate is slightly higher.
Negotiate fees, not just the rate: Many origination fees, processing fees, and closing costs are negotiable. Reducing a 2% origination fee to 1% on a $250,000 loan saves $2,500 and lowers your APR by approximately 0.10%.
Watch for variable APR credit cards: Credit card APRs are variable and tied to the prime rate. When the Federal Reserve raises rates, your credit card APR increases too. The average credit card APR reached 22.8% in 2025 according to the Federal Reserve.
Check for APR caps on adjustable-rate loans: ARMs may have low introductory APRs that reset higher. Ensure you know the lifetime cap, periodic cap, and the index plus margin used to calculate rate adjustments.

Disclaimer: This calculator is for informational purposes only and does not constitute financial, tax, or legal advice. Always consult a qualified professional for decisions specific to your situation.

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